UNITED STATES

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D. C. 20549 

 

**FORM 10-QSB/A**

 

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 

SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended: March 31, 2006 

 

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 

SECURITIES EXCHANGE ACT OF 1934 

For the transition period from to 

 

*Commission File Number:  000-30771*

 

**INTERACTIVE MOTORSPORTS AND**

**ENTERTAINMENT CORP.**

(Exact name of registrant as specified in charter) 

 

Indiana

(State or other jurisdiction of incorporation or organization) 

 

35-2205637

(I.R.S. Employer I.D. No.) 

 

5624 West 73rd Street, Indianapolis, Indiana 46278

(Address of principal executive offices)

 

(317) 295-3500

(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the Issuer: (1) filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. **(1) Yes x No [] (2) Yes x No []**

 

As of May 10, 2006, there were 93,769,177 (par value $0.0001) common shares issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: Exhibit Index on page 27.

 

1

 

**INDEX TO QUARTERLY REPORT ON FORM 10-QSB**

 

 

PAGE

NUMBER

SECTION

 

| NOTE ON FORWARD-LOOKING INFORMATION | 3 |
|-------------------------------------|---|

| BASIS OF PRESENTATION | 4 |
|-----------------------|---|

 

 

**PART I**

 

| ITEM 1. | Unaudited Financial Statements and Notes to Financial Statements |
|---------|------------------------------------------------------------------|

|   | Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 | 5 |
|--------|---------------------------------------------------------------------|---|

|   | Consolidated Statements of Operations for the Three Months Ended |
|--------|------------------------------------------------------------------|

|   | March 31, 2006 and 2005 | 7 |
|--------|-------------------------|---|

|   | Consolidated Statements of Cash Flows for the Three Months |
|--------|------------------------------------------------------------|

|   | Ended March 31, 2006 and 2005 | 8 |
|--------|-------------------------------|---|

|   | Notes to Consolidated Financial Statements | 10 |
|--------|--------------------------------------------|----|

| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
|---------|--------------------------------------------------------------------------------------------|----|

| ITEM 3. | Internal Controls and Procedures | 23 |
|---------|----------------------------------|----|

 

 

**PART II**

 

| ITEM 1. | Legal Proceedings | 24 |
|---------|-------------------|----|

| ITEM 2. | Changes in Securities | 24 |
|---------|-----------------------|----|

| ITEM 3. | Defaults Upon Senior Securities | 24 |
|---------|---------------------------------|----|

| ITEM 4. | Submission of Matters to a Vote of Security Holder | 24 |
|---------|----------------------------------------------------|----|

| ITEM 5. | Other Information | 24 |
|---------|-------------------|----|

| ITEM 6. | Exhibits and Reports on Form 8-K | 25 |
|---------|----------------------------------|----|

 

| SIGNATURES | 26 |
|------------|----|

 

| EXHIBITS INDEX | 27 |
|----------------|----|

 

 

 

2

 

**NOTE ON FORWARD-LOOKING INFORMATION**

 

This Form 10-QSB/A and other statements issued or made from time to time by the Company or its representatives contain statements, which may constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A Sections 77z-2 and 78u-5. Those statements include statements regarding the intent, belief, or current expectations of the Company and members of its management team as well as the assumptions on which such statements are based. All statements, trend analyses, and other information contained in this report relative to markets for the Company’s products and/or trends in the Company’s operations or financial results, as well as other statements which include words such as “anticipate,” “could,” “feel(s),”“believes,” “plan,” “estimate,” “expect,” “should,” “intend,” “will,” and other similar expressions, constitute forward-looking statements and are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions that may impact the disposable income and spending habits of consumers; (ii) the availability of alternative entertainment for consumers; (iii) the ability of the company to obtain additional capital and/or debt financing; (iv) the ability of the company to control costs and execute its business plan.

 

The reader is cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements are set forth herein. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. 

 

 

3

 

**BASIS OF PRESENTATION**

 

Effective August 2, 2002, Pacific International Holding, Inc., a Utah corporation (“PIH”), which was originally organized in 1986, changed its state of domicile and name by merging with and into Interactive Motorsports and Entertainment Corp. (the surviving entity), an Indiana corporation (the “Company”), pursuant to an Agreement and Plan of Reorganization. Per the merger agreement, each share of PIH common stock outstanding immediately prior to the effective date of the merger was cancelled and converted into four shares of Interactive Motorsports and Entertainment Corp. common stock. Although it had been in a variety of businesses for over 15 years, at the time of the merger, PIH had limited operations.

 

Subsequent to the merger and effective as of the same date, the Company acquired pursuant to a Plan and Agreement of Exchange all of the issued and outstanding shares of common stock and preferred stock of Perfect Line, Inc., an Indiana corporation (“Perfect Line”), from the Perfect Line shareholders in exchange on a “share-for-share” basis for shares of the Company’s common stock and preferred stock. As a result of the share exchange, the Perfect Line shareholders held as of August 2, 2002 Company shares representing approximately eighty-two percent (82%) of the Company’s capital stock. Also effective as of August 2, 2002, the members of the Board of Directors of Perfect Line were elected to replace the members of the Company’s Board of Directors and the executive officers of Perfect Line became the executive officers of the Company. 

 

As Perfect Line had revenues, operations, and business activity, for financial reporting purposes, Perfect Line is considered the acquirer, and therefore the predecessor, and the Company is considered the acquiree for accounting and reporting purposes. Due to the fact that the merger is being treated as a reverse acquisition, the equity of the Company has been recapitalized for financial reporting purposes. The operations of Interactive Motorsports and Entertainment Corp. have been included in consolidation from August 2, 2002 through March 31, 2006.

 

All information in this Form 10-QSB/A is presented from the perspective of Interactive Motorsports and Entertainment Corp. and its subsidiary Perfect Line and not from the perspective of PIH.

 

 

 

4

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets

 

 

**PART I**

 

**ITEM 1. CONDENSED FINANCIAL STATEMENTS** 

 

**ASSETS**

 

 

|                              |     | *March 31, 2006***  |     |     | *December 31, 2005*** |
|-----------------------------------|----------|---------------------|----------|----------|-----------------------|
|                              |     | **(**unaudited**)** |     |     |                  |
|                              | * * | *(Restated)***      | * * | * * | *(Restated)***        |
| *Current Assets***                | * * | * *            | * * | * * | * *              |
| Cash                              | $        | 152,828             |     | $        | 353,180               |
| Accounts Receivable               |     | 172,015             |     |     | 212,156               |
| Inventory                         |     | 126,069             |     |     | 208,453               |
| Prepaid Expenses                  |     | 80,135              |     |     | 73,314                |
| Notes Receivable                  |     | 3,005               |     |     | 21,600                |
| Total Current Assets              |     | 534,052             |     |     | 868,703               |
|                              |     |                |     |     |                  |
| *Property and Equipment***        | * * | * *            | * * | * * | * *              |
| Total Property and Equipment, Net |     | 1,093,701           |     |     | 1,187,811             |
|                              |     |                |     |     |                  |
| *Other Assets***                  | * * | * *            | * * | * * | * *              |
| Deposits                          |     | 28,471              |     |     | 28,471                |
| Other intangible assets, net      |     | 667                 |     |     | 1,742                 |
| Notes Receivable                  |     | 308,271             |     |     | 290,400               |
| Total Other Assets                |     | 337,409             |     |     | 320,613               |
|                              |     |                |     |     |                  |
| *Total Assets***                  | $        | 1,965,162           | * * | $        | 2,377,127             |

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Balance Sheets (Continued)

 

 

**LIABILTIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**

 

 

|                               |     | *March 31, 2006***    |     |     | *December 31, 2005*** |
|------------------------------------|----------|-----------------------|----------|----------|-----------------------|
|                               |     | **(**unaudited**)**** |     |     | * *              |
|                               | * * | *(Restated)***        | * * | * * | *(Restated)***        |
| *Current Liabilities***            | * * | * *              | * * | * * | * *              |
| Accounts Payable                   | $        | 695,870               |     | $        | 925,761               |
| Accrued Payroll Expense            |     | 22,891                |     |     | 56,438                |
| Accrued Sales Tax Payable          |     | 11,205                |     |     | 12,018                |
| Gift Cert. & Customer Deposits |     | 19,055                |     |     | 22,624                |
| Deposits on Simulator Sales        |     | 905,061               |     |     | 1,257,101             |
| Accrued Liabilities                |     | 429,206               |     |     | 379,820               |
| Notes Payable - Related parties    |     | 146,000               |     |     | 146,000               |
| Notes payable                      |     | 1,323,251             |     |     | 1,074,696             |
| Total Current Liabilities          |     | 3,552,539             |     |     | 3,874,458             |
|                               |     |                  |     |     |                  |
| *Long-term Liabilities*            |     |                  |     |     |                  |
| Notes  payable                     |     | 1,771,293             |     |     | 1,898,170             |
|                               |     |                  |     |     |                  |
| Total Liabilities                  |     | 5,323,832             |     |     | 5,772,628             |
|                               |     |                  |     |     |                  |
| *Shareholders Equity***            | * * | * *              | * * | * * | * *              |
| Common Stock                       |     | 9,377                 |     |     | 9,377                 |
| Additional Paid in Capital         |     | 5,360,270             |     |     | 5,360,270             |
| Retained Deficit                   |     | (8,728,317)           |     |     | (8,765,148)           |
| Total Shareholders Deficit         |     | (3,358,670)           |     |     | (3,395,501)           |
|                               |     |                  |     |     |                  |
| *Total Liabilities & Equity*** | $**      | 1,965,162             | * * | $**      | 2,377,127             |

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Operations

(Unaudited)

 

 

|                                            |   |   | *For the Three Months Ending*

*March 31, 2006*** |   |   | *For the Three Month*

*Ending*

*March 31, 2005*** |
|-------------------------------------------------|--------|--------|---------------------------------------------------|--------|--------|-----------------------------------------------------|
|                                            |   |   | *(Restated)***                                    |   |   | *(Restated)***                                      |
|                                            |   |   |                                              |   |   |                                                |
| *Revenues***                                    |   |   |                                              |   |   |                                                |
| Company Store Sales                             |   | $      | 501,515                                           |   | $      | 644,046                                             |
| Revenue Share Sales                             |   |   | 94,931                                            |   |   | 266,194                                             |
| Simulator Leases                                |   |   | 19,000                                            |   |   | -                                                   |
| Sales of Simulator Systems                      |   |   | 1,150,060                                         |   |   | 17,885                                              |
| Total Revenues                                  |   |   | 1,765,506                                         |   |   | 928,125                                             |
|                                            |   |   |                                              |   |   |                                                |
| *Cost of Sales***                               |   |   |                                              |   |   |                                                |
| COGS - Merchandise                              |   |   | 4,057                                             |   |   | 57,623                                              |
| Group Sales Expenses                            |   |   | 11,459                                            |   |   | 3,661                                               |
| COGS - Sale of Simulators                       |   |   | 337,738                                           |   |   | 201,214                                             |
| Total Cost of Sales                             |   |   | 353,254                                           |   |   | 262,498                                             |
|                                            |   |   |                                              |   |   |                                                |
| *Gross Profit***                                |   |   | 1,412,252                                         |   |   | 665,627                                             |
|                                            |   |   |                                              |   |   |                                                |
| *General & Admin Expenses***                |   |   |                                              |   |   |                                                |
| Payroll Related Expenses                        |   |   | 481,913                                           |   |   | 521,671                                             |
| Occupancy Expenses                              |   |   | 273,128                                           |   |   | 301,959                                             |
| Other Operating Expenses                        |   |   | 493,296                                           |   |   | 406,688                                             |
| Total Operating Expenses                        |   |   | 1,248,337                                         |   |   | 1,230,318                                           |
|                                            |   |   |                                              |   |   |                                                |
| *Operating Profit (Loss)***                     |   |   | 163,915                                           |   |   | (564,691)                                           |
|                                            |   |   |                                              |   |   |                                                |
| Interest Expense                                |   |   | (127,084)                                         |   |   | (132,641)                                           |
|                                            |   |   |                                              |   |   |                                                |
| *Net Income (Loss) before Income Tax Expense*** |   |   | 36,831                                            |   |   | (697,332)                                           |
|                                            |   |   |                                              |   |   |                                                |
| Income Tax Expense                              |   |   | -                                                 |   |   | -                                                   |
|                                            |   |   |                                              |   |   |                                                |
| *Net Income (Loss)***                           |   | $      | 36,831                                            |   | $      | (697,332)                                           |
|                                            |   |   |                                              |   |   |                                                |
| Net Loss per share                              |   | $      | (0.00)                                            |   | $      | (0.01)                                              |
|                                            |   |   |                                              |   |   |                                                |
| Weighted Average Shares Outstanding             |   |   | 93,769,177                                        |   |   | 87,715,910                                          |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

(Unaudited)

 

7

 

 

|                                                       |   |   | For the Three Months Ended

March 31 |
|------------------------------------------------------------|--------|--------|--------------------------------------|
|                                                       |   |   |
|                                                       |   |   | 2006

*(Restated)***                 |   |   | 2005

*(Restated)*** |
|                                                       |   |   |                                 |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                       |   |   |                                 |   |   |   |
|                                                       |   |   |                                 |   |   |   |
| Net income (loss)                                          |   | $      | 36,831                               |   | $ | (697,332) |
| Adjustments to reconcile net loss to net cash              |   |   |                                 |   |   |   |
| used by operating activities:                              |   |   |                                 |   |   |   |
| Depreciation and amortization                              |   |   | 114,813                              |   |   | 91,606 |
| Warrants issued related to sales agreements                |   |   | -                                    |   |   | 55,233 |
| Amortization of notes payable discount                     |   |   | 1,958                                |   |   | 56,769 |
| Net changes in operating assets and liabilities:           |   |   |                                 |   |   |   |
| (Increase) decrease in trade accounts and other receivable |   |   | 40,865                               |   |   | (165,604) |
| (Increase) decrease in inventory                           |   |   | 82,384                               |   |   | (210,759) |
| (Increase) decrease in prepaid expenses and other assets   |   |   | (6,821)                              |   |   | 1,979 |
| Decrease in intangibles                                    |   |   |                                 |   |   | (46,482) |
| Decrease in deposits                                       |   |   | -                                    |   |   | (1,400) |
| Increase (decrease) in accounts payable                    |   |   | (229,891)                            |   |   | 200,806 |
| Decrease in accrued payroll and payroll taxes              |   |   | (33,547)                             |   |   | (41,366) |
| Decrease in sales tax payable                              |   |   | (812)                                |   |   | (10,723) |
| Decrease in gift certificates and customer deposits        |   |   | (3,568)                              |   |   | (2,331) |
| Increase (decrease) in accrued expenses                    |   |   | 49,383                               |   |   | (48,454) |
| Increase (decrease) in deposits on simulator sales         |   |   | (352,040)                            |   |   | 586,873 |
|                                                       |   |   |                                 |   |   |   |
| Net Cash Used by Operations                                |   |   | (300,445)                            |   |   | (231,185) |
|                                                       |   |   |                                 |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                       |   |   |                                 |   |   |   |
|                                                       |   |   |                                 |   |   |   |
| Purchase of property and equipment                         |   |   | (161,640)                            |   |   | (208,951) |
| Sale of property and equipment                             |   |   | 142,013                              |   |   | 63,445 |
|                                                       |   |   |                                 |   |   |   |
| Net Cash Used by Investing Activities                      |   |   | (19,627)                             |   |   | (145,506) |
|                                                       |   |   |                                 |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                       |   |   |                                 |   |   |   |
|                                                       |   |   |                                 |   |   |   |
| Proceeds from issuance (payment) of notes payable          |   |   | 119,720                              |   |   | (502,844) |
|                                                       |   |   |                                 |   |   |   |
| Net Cash Provided (Used) by Financing Activities           |   |   | 119,720                              |   |   | (502,844) |
|                                                       |   |   |                                 |   |   |   |
| DECREASE IN CASH                                           |   |   | (200,352)                            |   |   | (879,535) |
|                                                       |   |   |                                 |   |   |   |
| CASH, BEGINNING OF PERIOD                                  |   |   | 353,180                              |   |   | 1,334,673 |
|                                                       |   |   |                                 |   |   |   |
| CASH, END OF PERIOD                                        |   | $      | 152,828                              |   | $ | 455,138 |
|                                                       |   |   |                                 |   |   |   |

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

 

|                                               |   |   | For the Three Months Ended

March 31 |
|----------------------------------------------------|--------|--------|--------------------------------------|
|                                               |   |   |
|                                               |   |   | 2006

*(Restated)***                 |   |   | 2005

*(Restated)*** |
|                                               |   |   |                                 |   |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES:                |   |   |                                 |   |   |   |
|                                               |   |   |                                 |   |   |   |
| Cash paid for interest                             |   | $      | 25,479                               |   | $ | 23,882 |
|                                               |   |   |                                 |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH

TRANSACTIONS: |   |   |                                 |   |   |   |
|                                               |   |   |                                 |   |   |   |
| Discount on convertible notes                      |   | $      | -                                    |   | $ | 51,812 |
| Warrants issued related to sales agreements        |   | $      | -                                    |   | $ | 55,233 |
|                                               |   |   |                                 |   |   |   |

 

 

 

9

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

March 31, 2006 and December 31, 2005

 

| NOTE 1 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|----------|--------------------------------------------|

 

|   | a. | Unaudited Interim Financial Information |
|--------|----|-----------------------------------------|

 

The accompanying unaudited condensed consolidated balance sheets of Interactive Motorsports and Entertainment Corp. (the “Company”) at March 31, 2006 and December 31, 2005 and the unaudited consolidated statements of operations and statements of cash flows for the three months ended March 31, 2006 and March 31, 2005 have been prepared by the Company’s management and do not include all the information and notes to the financial statements necessary for a complete presentation of the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.  Although management believes the disclosures are adequate to makethe information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s latest annual financial statements included in the Company’s annual report on Form 10-KSB.  The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006 or any future period.

 

|   | b. | Use of Estimates |
|--------|----|------------------|

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

|   | c. | Accounting for the sale of simulators |
|--------|----|---------------------------------------|

 

The Company records the sale of simulators using the percentage of completion method of accounting.  The percentage of completion for any given sales contract is determined by the ratio of costs incurred to date to the total estimated cost for each site build.  Costs incurred consist of purchased components, outside services, and outside contract labor cost.  

 

 

| NOTE 2 - | DEBT AND CREDIT ARRANGEMENTS |
|----------|------------------------------|

 

Pursuant to a Note and Option Purchase Agreement and Security Agreement dated February 2, 2004, the note holder of the final $146,000 was repaid $50,000 in the third quarter of 2005, with the balance due by December 31, 2006, with the expiration of the accompanying option on February 1, 2007.  The value of the options was amortized to interest expense over their original life which expired March 1, 2005.  Amortization of option discount for the options related to the 2004 Agreement of $51,812 was included in interest expense for the twelve months ended December 31, 2005.

 

 

10

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

March 31, 2006 and December 31, 2005

 

| NOTE 2 - | DEBT AND CREDIT ARRANGEMENTS (Continued) |
|----------|------------------------------------------|

 

Pursuant to the Note and Option Purchase Agreement and Security Agreement dated November 2005 (“2005 Agreement”), the Company issued notes bearing an interest rate of 12% payable in the total amount of $122,500.  These notes were issued between October 13, 2005 and November 4, 2005.  Each note came with an option to purchase common shares of the Company equal to the amount of notes purchased divided by the exercise price of the option.  The notes are due on October 1, 2007.

 

The value of the options will be amortized to interest expense over their life which expires on November 1, 2007.  Amortization of option discount for the options related to the 2005 Agreement of $1,530 was included in interest expense for the twelve months ended December 31, 2005.

 

On March 29, 2006, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a stipulation agreement whereby Perfect Line signed a promissory note totaling $294,652  payable in five (5) quarterly installments, with the first payment of $78,471 made on February 28, 2006, and payments of $54,045 to be made beginning July 14, 2006 and ending July 15, 2007. 

 

| NOTE 3 - | SIMULATOR AGREEMENTS |
|----------|----------------------|

 

The Company completed the sale of four SMS simulators to the operator of the Mentor, OH location, the sale of six SMS simulators to an operator in Kissimmee, FL, the sale of two SMS simulators to be used by DaimlerChrysler at various North American automotive shows and corporate events and the sale of 4 Reactor simulators to H & H Motorsports for their Reactor Mobile Experience.   In addition, 28% of the asset sale to Race Car Simulation Corp. was booked in January following installation of the 6 SMS simulators at the NASCAR SpeedPark in Myrtle Beach, SC and 72% of the sale of 4 SMS simulators to Vacationland Family Entertainment in Brainerd, MN was booked in March.  The Company also has a signed asset purchase agreement for 4 Reactor simulators to be installed in the NASCAR SpeedPark in Concord, NC in May of this year.

 

| NOTE 4 - | RESTATEMENT |
|----------|-------------|

 

Company management made the decision to restate the Company’s financials from the period beginning with Form 10-KSB for the year ended December 31, 2004 to the current date in order to account for the transactions with Race Car Simulator Corporation (“RCSC”) as a borrowing rather than an asset purchase in accordance with the guidance provided in paragraphs 21-22 of the Statement of Financial Accounting Standards No. 13 (SFAS 13).  Management has concluded that it made a misinterpretation of this technical accounting rule.  In order to make a fair presentation of its financials in compliance with Generally Accepted Accounting Principles, the Company is revising its revenue recognition policy with respect to sales where the Company retains substantial risk of ownership as defined in SFAS 13.   

 

 

11

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

March 31, 2006 and December 31, 2005

 

| NOTE 4 - | RESTATEMENT (Continued) |
|----------|-------------------------|

 

SFAS 13, paragraph 21 states, “The sale of property subject to an operating lease, or of a property that is leased by or intended to be leased by the third-party purchaser to another party, shall not be treated as a sale if the seller or any party related to the seller retains substantial risks of ownership in the leased property.”  The paragraph goes on to describe an example where, in the case of a default by lessee or termination of the lease, the arrangements may involve a commitment by the seller to substitute an existing lease or to secure a replacement lessee under a remarketing agreement.  A remarketing agreement by itself shall not disqualify accounting for the transaction as a sale if the seller (a) will receive a reasonable fee commensurate with the effort involved at the time of securing a replacement lessee for the property and (b) is not required to give priorityto the re-leasing of the property owned by the third party purchaser over similar property owned by the seller.  In the case of the Company’s Asset Purchase Agreements and Management Agreements with RCSC, Section 4.12 of the Asset Purchase Agreement provides RCSC, the Buyer, with a performance guarantee from the Company, the Seller, that Buyer shall receive at least the minimum guaranteed minimum payment amounts with respect to each Lease in effect on the date of the transaction.  Since most of the Leases had terms of 3 years, the Company is considered to maintain “significant risk” during this guarantee period of time as defined in SFAS 13.  Secondly, Section 1(a)(ii) of the Management Agreement between the Company and RCSC states that if any Simulators are not, at any time, being utilized to generate revenue for RCSC, the Company is obligated to place such Simulators into service under Leases with operators prior to placing any of its own Simulators into any sucharrangements.  Management has determined that the “substantial risk” under the Asset Purchase Agreements with RCSC is valid for a three year period since the risk of receiving ongoing minimum guarantees from the lease or revenue share agreements shifts to the Buyer after the three year period.   Management has determined that the “substantial risk” under the Management Agreement is valid for a five year period since this is the expected time period for RCSC’s Aggregate Investment Amount to reach zero as detailed in Section 4 (a) of the Management Agreement.  Once the Aggregate Investment Amount has reached zero (five years at the minimum payment levels of the leases/revenue share agreements), then the Company is compensated with 75% of the aggregate cash payments received by RCSC from the leases/revenue share agreements.  Under the guidance provided in SFAS 13, the risk shifts to the Buyer (RCSC) at this time since the Seller (the Company) is being reasonablycompensated for the effort under the Management Agreement. 

 

 

12

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

September 30, 2005 and December 31, 2004

 

| NOTE 4 - | RESTATEMENT (Continued) |
|----------|-------------------------|

 

Management has concluded that the because ‘substantial risk”, as defined within SFAS 13, exists during the five year period after the Asset Purchase Agreement and Management Agreement transactions with RCSC and that such risk shifts at the three and five year periods, the Company’s transactions with RCSC on December 31, 2004, March 31, 2005 and April 15, 2005 shall each be treated from an accounting standpoint as a borrowing rather than an asset sale, and has restated its financials during this period of time to reflect this change in accounting.

 

The discovery has prompted management to restate its 2004 financial statements to recognize a change in Net Income (Loss) through an adjustment to revenue from simulator sales.

 

 

|                 | As Reported | As Adjusted | Difference | Change in EPS |
|----------------------|-------------|-------------|------------|---------------|
| For the Period ended |        |        |       |          |   |   |   |   |
| 3/31/2005            |        |        |       |          |   |   |   |   |
| Net (Loss)           | $           | (38,726)    | $          | (697,331)     | $ | (658,605) | $ | (0.01) |
|                 |        |        |       |          |   |   |   |   |
| For the Period ended |        |        |       |          |   |   |   |   |
| 12/31/2005           |        |        |       |          |   |   |   |   |
| Total Assets         | $           | 1,978,330   | $          | 2,377,127     | $ | 398,797 |   |   |
| Total Liabilities    | $           | 3,722,200   | $          | 5,772,628     | $ | (2,050,428) |   |   |
| Shareholder Deficit  | $           | (1,743,870) | $          | (3,395,501)   | $ | (1,651,631) |   |   |
| Net (Loss)           | $           | (560,460)   | $          | (1,095,074)   | $ | (534,614) | $ | (0.01) |
|                 |        |        |       |          |   |   |   |   |
| For the Period ended |        |        |       |          |   |   |   |   |
| 3/31/2006            |        |        |       |          |   |   |   |   |
| Total Assets         | $           | 1,598,308   | $          | 1,965,162     | $ | (366,854) |   |   |
| Total Liabilities    | $           | 3,362,881   | $          | 5,323,832     | $ | (1,960,951) |   |   |
| Shareholder Deficit  | $           | (1,764,573) | $          | (3,358,670)   | $ | (1,594,097) |   |   |
| Net Income (Loss)    | $           | (20,703)    | $          | 36,831        | $ | 57,534 | $ | (0.00) |
|                 |        |        |       |          |   |   |   |   |

 

 

 

13

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP. AND SUBSIDIARIES**

Notes to the Consolidated Financial Statements

September 30, 2005 and December 31, 2004

 

| NOTE 5 - | SUBSEQUENT EVENTS |
|----------|-------------------|

 

Management is currently negotiating with NASCAR to reduce the scope of the license agreement for the name “NASCAR Silicon Motor Speedway” and the trademarked logo, or possibly to terminate the license which currently has a term until 2009.  The Company uses the NASCAR Silicon Motor Speedway on its two owned and operated racing centers in Mall of America and Universal CityWalk, but has limited additional sites where the brand is used.  Without sites generating royalties to NASCAR, the Company has fallen behind in royalty payments and minimum guarantees, and therefore is in discussions with NASCAR to either maintain the license at limited locations, or terminate the license.  

 

The Company is negotiating for the financing of 16 Reactor simulators that would be installed in the following locations: 6 in Mall of America, 2 in Universal CityWalk, and 4 in each of two Reactor Mobile Experiences.  This financing, or alternatively an additional asset purchase in the near future, is essential for the Company to maintain its current monthly cash flow needs.

 

The Company is behind three months in rent to its landlord at one of its owned and operated mall stores, but is working with the landlord to resolve this amicably.

 

 

 

14

**ITEM 2. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The terms “Company”, “we”, “our” or “us” are used in this discussion to refer to Interactive Motorsports and Entertainment Corp. along with Interactive Motorsports and Entertainment Corp.’s wholly owned subsidiary, Perfect Line, Inc., on a consolidated basis, except where the context clearly indicates otherwise. The discussion and information that follows concerns the Registrant as it exists today, as of this filing, including the predecessor of the Company’s operations, Perfect Line, LLC. This discussion and analysis does not relate to the operations of Pacific International Holding, Inc. which had limited operations prior to the merger with the Company onAugust 2, 2002.

 

**Overview**

 

Interactive Motorsports and Entertainment Corp. (“IMTS” or the “Company”), an Indiana corporation, through its wholly owned subsidiary, Perfect Line, Inc., is a world leader in race simulation.  The Company is in the business of manufacturing and then selling, revenue sharing or leasing race car simulators to contracted parties in malls, amusement parks, family entertainment centers, casinos and auto malls and mobile fan interactive experiences. Under licenses from America’s fastest growing sport, NASCAR, simulator customers experience driving in a NASCAR race car that simulates the motion, sights and sounds of an actual NASCAR event.  The Company owns and operates NASCAR Silicon Motor Speedway racing centers at the Mall of America in Minneapolis, MN, and at Universal CityWalk in Hollywood, CA, where racing on 12 simulators and NASCAR merchandise are sold at each site.

 

The Company currently has two versions of race car simulators, the SMS and the Reactor, and in marketing these two products it leverages its strategic relationships and proprietary assets, which include (a) sophisticated racing simulation technology (including 2 patents), (b) an exclusive licensing agreement with NASCAR, and (c) license agreements with other racing entities including race tracks, race teams, and race sponsors to offer a unique and affordable race simulation experience. 

 

For the three months ending March 31, 2006, the Company’s racing centers, leased and revenue share simulators and sold simulators generated revenue of approximately $1.6 million. Management has transitioned the Company’s business model from an owned and operated, mall-based racing center concept to a simulator purchase, revenue share or leasing business, with the owner of the purchased simulators required to enter into an ongoing license and maintenance agreement.  The Company now offers two simulator products, both using the proprietary software and motion platform, but each offering different features and different price points.  The Company plans to offer License, Operation and Maintenance agreements to potential operators of its new Reactor Mobile Experience (48 foot trailer with 4 Reactors installed).

 

 

15

Major Agreements:  During 2005, the Company entered into lease and revenue share agreements as well as entered into transactions for the sale of the original (“SMS”) simulators and the new Reactor and Reactor Mobile Experience simulators.  On December 31, the Company entered into an asset purchase agreement and long term note agreement with Checker Flag Lightning whereby the 28 simulators within three Mills Corporation mall stores were sold in exchange for the Mills releasing Perfect Line of all past, current and future obligations. 

 

Perfect Line’s race simulators, including those owned by Race Car Simulation Corp., are currently featured in the following locations.  

 

**Locations**

 

***Company Owned (24 Simulators):***

 

| ***Location*****              | ***Market*****  | ***Sq. Ft.***** | ***Simulators***** |
|-------------------------------|-----------------|-----------------|--------------------|
| ***1)***   Mall of America    | Minneapolis, MN | 5,899           | 12 SMS             |
| ***2)***   Universal CityWalk | Los Angeles, CA | 5,000           | 12 SMS             |

 

 

***Revenue Share (72 Simulators):***

 

| ***Location*****                        | ***Market*****    | ***Sq. Ft.***** | ***Simulators***** |
|-----------------------------------------|-------------------|-----------------|--------------------|
| ***1)***   Mall of Georgia              | Atlanta, GA       | 5,895           | 8 SMS              |
| ***2)***   Riverchase Galleria          | Birmingham, AL    | 6,188           | 8 SMS              |
| ***3)***   Jordan Creek Town Ctr        | Des Moines, IA    | 4,000           | 8 SMS              |
| ***4)***   NASCAR SpeedPark             | Sevierville, TN   | 1,584           | 6 SMS#             |
| ***5)***  NASCAR SpeedPark              | St. Louis, MO     | 1,496           | 6 SMS#             |
| ***6)***  NASCAR SpeedPark              | Toronto, Canada   | 1,500           | 6 SMS#             |
| ***7)***  NASCAR SpeedPark              | Myrtle Beach, SC  | 1,600           | 6 SMS#             |
| ***8)***  Playcenter (b)                | Sao Paulo, Brazil | 1,000           | 4 SMS*             |
| ***9)***  Burdick Driver’s Village | Syracuse, NY      | 3,472           | 8 SMS#             |
| ***10)***  Bass Pro Outdoor             | Harrisburg, PA    | 500             | 2 SMS              |
| ***11)***  Bass Pro Outdoor             | Clarksville, IN   | 750             | 3 SMS              |
| ***12)***  University Mall              | Burlington, VT    | 3,700           | 5 SMS              |
| ***13)***  Bass Pro Outdoor (a)         | Sheffield, OH     | 500             | 2 SMS              |

 

 

|   | a. | Scheduled to open Q2 |
|--------|----|----------------------|

|   | b. | Scheduled to open TBD |
|--------|----|-----------------------|

 

 

16

***Mobile Units (16 Simulators):***

 

| ***1)***   Nextel Mobile Experience    | 2004-06 NASCAR Nextel Cup series events | 6 SMS# |
|----------------------------------------|-----------------------------------------|--------|
| ***2)***   Perfect Line/NTI Experience | Mobile Experience                       | 2 SMS  |
| ***3)***   Nextel Mini Experiences     | Nextel regional marketing               | 6 SMS# |
| ***4)***  DaimlerChrysler              | European Auto Shows                     | 2 SMS  |

 

 

***Sales of Simulators (74 Simulators):***

 

| ***Buyer*****                    | ***Market*****             | ***Simulators***** |
|----------------------------------|----------------------------|--------------------|
| ***1)***   Roltex                | Moscow, Russian Federation | 8 SMS*             |
| ***2)***   Tonne Mgmt.           | Wisconsin Dells, WI        | 4 SMS*             |
| ***3)***   Ft. Gordon            | Ft. Gordon, GA             | 2 SMS              |
| ***4)***   I-Vision Tech.        | Abu Dhabi, UAE             | 4 SMS              |
| ***5)***   I-Vision Tech.        | Abu Dhabi, UAE             | 2 SMS              |
| ***6)***  Fun City               | Burlington, IA             | 1 SMS              |
| ***7)***  DaimlerChrysler        | US Auto Shows in 2006      | 2 SMS              |
| ***8)***  NASCAR SpeedPark       | Concord, NC                | 4 Reactors         |
| ***9)***  Opry Mills             | Nashville, TN              | 10 SMS             |
| ***10)***  Gurnee Mills          | Chicago, IL                | 6 SMS              |
| ***11)***  Concord Mills         | Charlotte, NC              | 12 SMS             |
| ***12)***  H&H Motorsports   | Boone, NC                  | 4 Reactors         |
| ***13)***  Gate A Sports         | Cleveland, OH              | 5 SMS              |
| ***14)***  Skycoaster of Florida | Kissimmee, FL              | 6 SMS              |
| ***15)***  Vacationland F.E.     | Brainerd, MN               | 4 SMS              |

 

 

# Denotes asset sold to Race Car Simulation Corporation with no current revenue stream to Company

* Denotes that simulators are not yet installed

 

The balance of the 192 SMS simulators built since inception are at the Company’s warehouse or Elan Motorsports Technologies where they are built.

 

 

17

**History**

 

NSMS racing centers were originally owned and developed by Silicon Entertainment, Inc. (“SEI”).  SEI opened its first site in August 1997 at the Mall of America in Bloomington, Minnesota, the largest mall in the United States.  SEI raised large sums of initial capital, of which, according to SEI internal documents, approximately $6.5 million was utilized to create its proprietary software technology and approximately $25 million was utilized to produce approximately 170 SMS simulators and complete the build-out of 15 stores in high traffic malls. SEI was unable to secure additional long term financing to support its capital expansion, and was liquidated through Chapter 7 bankruptcy in April 2001. Perfect Line’s assets were primarily acquired from creditors of SEI. As a result of SEI’s bankruptcy, Perfect Line was able to purchase the assets of SEI at a price substantially below SEI’s cost. 

 

Perfect Line, LLC, a predecessor to Perfect Line, Inc., initially tested the mall-based business model by re-opening 12 of the SEI racing centers, which utilized 136 of the SMS simulators, between July 2001 and August 2002.  The Company then warehoused 32 SMS simulators for future deployment and 2 SMS simulators were used for research and development purposes at the Company’s technology center in Santa Clara, California. The proprietary technology includes two U.S. Patents, which combine to create what management believes to be one of the world’s most realistic simulations of the sights, sounds and motions experienced by driving in an actual NASCAR race. The patented motion-based platform that the racecar simulator is mounted on is among the other assets that were acquired and licensed as part of the SEI asset purchase.

 

In August 2002, Perfect Line became a wholly owned subsidiary of IMTS, through an exchange of shares that resulted in Perfect Line shareholders owning approximately 82% of IMTS equity.  Simultaneous with this event, approximately $2.6 million in private equity financing was made available to Perfect Line.  Approximately one-half of the funding was used to retire the Company’s bank note and the balance was used for working capital.  

 

In July of 2003, management began the process of revising the Company’s business model, changing the focus from the inherited Company owned and operated mall-based racing centers to revenue share, lease and purchased simulators for mall merchandise retailers, family entertainment centers, amusement parks, casinos, auto malls, etc. and mobile lease programs such as the Nextel Experience and the DaimlerChrysler auto show exhibits.  After testing the assignment of one mall lease to Checker Flag Lightning (“CFL”) of Granville, Michigan in November of 2003, the Company assigned an additional six (6) mall leases to CFL in March of 2004. The business model change resulted in the Company’s first quarterly operating profit for the quarter ending September 30, 2004, and first quarterly net profit for the quarter ended December 31, 2004.  

 

While the Company  began to earn profits by late 2004, management decided it was necessary to generate cash to reduce debt and secure growth capital   As a result, on December 31, 2004 and on March 31 and April 15, 2005, the Company entered into three Asset Purchase Agreements pursuant to which it sold a total of forty-four (44) of its existing race car simulators in revenue producing sites to Race Car Simulation Corporation (“RCSC”), a wholly owned subsidiary of Dolphin Direct Equity Partners, LP (“Dolphin”) for an aggregate purchase price of $2,856,600.  The sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13.  While these transactions reduced debt and allowed the Company to begin building new simulators, it also reduced cash flow by approximately $1,000,000 on an annual basis until the Company could activate another 44simulators into the market on a revenue share basis.  This, coupled with the fact that Checker Flag Lightning stopped paying on its revenue share agreements (approximately $1,000,000 annually) created cash flow issues for the Company during 2005.  The sale of SMS simulators during this period helped to offset the cash flow problem, and continues to be essential to maintain the cash flow required to cover monthly general and administrative costs.

 

 

18

**Overview of Financial Position and Results of Operations**

 

During the three months ended March 31, 2006, the Company had total revenues of $1,765,506 compared to $928,125 for the three months ended March 31, 2005, a 90% increase.  Revenue from company store sales decreased by 22% as the company executed its revised business plan focusing on simulator sales and revenue share/lease locations versus company owned locations.  On a per store basis, the Company generated an average of $214,682 per store on the three company store locations in the first three months of 2005, compared with $220,258 per store on the two store locations operating in the comparable period in 2006.  Offsetting the decline in total company store sales in the first three months ending March 31, 2006 and a 64% decrease in revenue share sales was a 6,330% increase sales of simulators as compared to the first three months ending March 31, 2005.  The Company recorded all or a portion of 6 salestransactions for 23 SMS simulators and 4 Reactor simulators.

 

The Company recorded its second quarterly operating profit during the three months ending March 31, 2006.  Revenues increased by $837,381 for the three months ending March 31, 2006 as compared to the three months ending March 31, 2005, cost of good sold for the comparable periods increased by $90,756.  This was the result of the change in the mix of the Company’s revenue sources, with the Company focusing on simulator sales and revenue share/lease locations versus company owned locations.  Consequently, gross profit for the three months ending March 31, 2006 increased by 112% as compared to the same period in 2005.

 

Offsetting the increase in gross profit was the increase in operating expenses of 1%, resulting in a $163,915 operating profit for the quarter ending March 31, 2006.  This operating profit represents an increase of $728,606 from the $564,691 operating loss for the quarter ending March 31, 2005.  Payroll expenses declined 7.8% and occupancy expenses declined 9% when comparing the first quarter 2006 to the first quarter 2005. Interest expense for the three months ending March 31, 2006 was $127,084 as compared to $132,641 for the comparable quarter in 2005.  The net income for the quarter ending March 31, 2006 of $36,831 was $734,163 greater than the $697,332 loss for the same quarter one year ago.  The three month period ending March 31, 2006 marked the second consecutive quarter that the company was able to generate a positive operating profit and positive EBITDA.  EBITDA for the three months ending March31, 2006 was $278,728 as compared to $(468,128) for the same period ending March 31, 2005.  Since inception on May 31, 2001 and through March 31, 2006, the Company has accumulated aggregate losses totaling $8,765,148.

 

The Company’s cash flow from operations decreased during the quarter ending March 31, 2006 as compared to the comparable period in 2005.  Cash used from operations for the three months ending March 31, 2006 decreased by $69,260 to $300,445 as compared to the same three month period in 2005.  The cash requirements from the increases in accounts receivable and inventory were partially offset by the increase in accounts payable.  Additionally, deposits on simulator sales decreased due to the recording of six SMS and Reactor simulator sales transactions in the quarter.  Cash flow from all sources (operations, investing activities and financing activities) was insufficient to fund the company during the three months ending March 31, 2006, and resulted in a $200,352 reduction in the Company’s cash position.  This compares with $879,535 in cash reduction for all sources for the period ending March 31, 2005. 

 

 

19

The Company has funded its retained losses through the initial investment of $650,000 in May 2001, $400,000 of capital contributed in February 2002, approximately $2.6 million received in August 2002, loans from related parties including net proceeds of $687,500 received in March, 2003, and net proceeds received between February 2004 and June 2004 totaling $604,000, $122,500 in loan proceeds form the sale of the 2005 Notes between October and November, 2005,  $1.257 million received in the form of deposits for the placement of race car simulators in revenue share locations, or for the future purchase by third parties of racecar simulators, and by delaying payments to its vendors.

 

**Review of Consolidated Financial Position**

 

**Cash and Cash Equivalents**: The Company had $152,828 in cash as of March 31, 2006 compared with $353,180 at December 31, 2005, a decrease of $200,352.  This decrease in the company’s position of cash during the first three months of 2006 was due principally to payments to vendors and general operating expenses.  See further discussion under the “Liquidity and Capital Resources” section below.

 

**Trade Accounts Receivable**:  At the year ending December 31, 2005, the Company established a reserve of $245,254 for a portion of the debt owed the Company by Checker Flag Lightning.  The Company continues to pursue the collection of the debt owed the Company by CFL, and there is disagreement between the parties as to the amount due.

 

**Inventory:**  At March 31, 2006, inventory decreased by $82,384 from December 31, 2005 levels due primarily to the delivery of simulators from Elan Motorsports or the Company’s warehouse for deployment to new sites.  Simulators in inventory decreased by $80,062 from December 31, 2005 levels to $125,628 at March 31, 2006.  Merchandise inventory decreased by $2,322 from December 31, 2005 levels during the period ending March 31, 2006 as the Company did not have the cash to replenish merchandise stock after the holidays.    

 

**Notes Payable**:  On March 7, 2003, the Company entered into a short term financial agreement (the Secured Bridge Notes) whereby the Company borrowed $700,000 for working capital purposes.  The Agreement also involved the issuance of warrants for 2,941,176 common shares.  The warrants had a strike price of $0.17, and expired on June 30, 2004.  

 

Two of the four Secured Bridge Notes continue to maintain a balance totaling $650,000, of which a net $100,000 in new funds were advance in 2005.  One of the four Secured Bridge Notes dated March, 2003 was paid in full in 2004, and another of the notes, along with an additional Company obligation, was transferred to a third party controlled by a major Company shareholder and rolled into the 2004 Note and Option Purchase Agreement described below.

 

Between February and June, 2004, the Company sold a series of notes collectively referred to as the 2004 Note and Option Purchase Agreement in the total amount of $750,000.  These notes generated $604,000 in cash, while $146,000 of the notes were the result of a transfer to a third party controlled by a major Company shareholder of a prior company obligation under the Secured Bridge Notes described above.  The Agreement also involved the issuance of options for approximately 6,904,395 common shares.  The options had a strike price equal to the closing price of IMTS stock on the date the note was purchased, which ranged from $.08 to $.21 per share.  2,804,395 of the options expired on March 1, 2005, while the remaining 4,100,000 options were exercised for repayment of the Note per the terms of the 2004 Note and Option Purchase Agreement.

 

 

20

On March 29, 2006, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a stipulation agreement whereby Perfect Line signed a promissory note totaling $294,652 payable in five (5) quarterly installments, with the first payment of $78,471 made on February 28, 2006, and payments of $54,045 to be made beginning July 14, 2006 and ending July 15, 2007. 

 

**Deposits on Simulator Sales**:  During the three month period ending March 31, 2006, the Company recorded all or a portion of six SMS and Reactor simulator sales transactions.  This activity resulted in the reduction of deposits on simulator sales of $352,040 to $905,061 as compared to the balance at December 31, 2005.

 

**Other Liabilities**:  Accounts payable, accrued payroll and payroll taxes, sales taxes payable, unearned revenue, and other accrued expenses fluctuate with the volume of business, timing of payments, and the day of the week on which the period ends. 

 

**Review of Consolidated Results of Operations**

 

During the three months ended March 31, 2006, the Company had total revenues of $1,765,506 compared to $928,125 for the three months ended March 31, 2005, a 90% increase.  Revenue from company store sales decreased by 22% as the company executed its revised business plan focusing on simulator sales and revenue share/lease locations versus company owned locations.  On a per store basis, the Company generated an average of $214,682 per store on the three company store locations in the first three months of 2005, compared with $220,258 per store on the two store locations operating in the comparable period in 2006.  Offsetting the decline in total company store sales in the first three months ending March 31, 2006 and a 64% decrease in revenue share sales was a 6,330% increase sales of simulators as compared to the first three months ending March 31, 2005.  The Company recorded all or a portion of 6 salestransactions for 23 SMS simulators and 4 Reactor simulators.

 

The Company recorded its second quarterly operating profit during the three months ending March 31, 2006.  Revenues increased by $837,381 for the three months ending March 31, 2006 as compared to the three months ending March 31, 2005, cost of good sold for the comparable periods increased by $90,756.  This was the result of the change in the mix of the Company’s revenue sources, with the Company focusing on simulator sales and revenue share/lease locations versus company owned locations.  Consequently, gross profit for the three months ending March 31, 2006 increased by 112% as compared to the same period in 2005.

 

Offsetting the increase in gross profit was the increase in operating expenses of 1%, resulting in a $163,915 operating profit for the quarter ending March 31, 2006.  This operating profit represents an increase of $728,606 from the $564,691 operating loss for the quarter ending March 31, 2005.  Payroll expenses declined 7.8% and occupancy expenses declined 9% when comparing the first quarter 2006 to the first quarter 2005. Interest expense for the three months ending March 31, 2006 was $127,084 as compared to $132,641 for the comparable quarter in 2005.  The net income for the quarter ending March 31, 2006 of $36,831 was $734,163 greater than the $697,332 loss for the same quarter one year ago.  The three month period ending March 31, 2006 marked the second consecutive quarter that the company was able to generate a positive operating profit and positive EBITDA.  EBITDA for the three months ending March31, 2006 was $278,728 as compared to $(468,128) for the same period ending March 31, 2005.  Since inception on May 31, 2001 and through March 31, 2006, the Company has accumulated aggregate losses totaling $8,765,148

 

 

21

**Liquidity and Capital Resources**

 

The primary source of funds available to the Company are receipts from customers for simulator and merchandise sales in its two owned and operated racing centers, percentage of gross revenues from simulator races and minimum guarantees from revenue share and lease sites, the sale of simulators, proceeds from equity offerings including the $2,610,050 received in August 2002, proceeds from debt offerings including the $700,000 in Secured Bridge Notes and warrants issued in March 2003, the $604,000 in net proceeds from Notes and options issued between February and June, 2004, the additional loan of a net $100,000 from one of the existing Bridge Loan note holders, $122,000 from the 2005 Note, loans from shareholders, credit extended by vendors, and possible future financings.  

 

As of the filing of this Form 10-QSB/A, the net proceeds of $1,874,708 from the three sales transactions for the sale of 44 simulators to Race Car Simulation Corp. have been depleted.  The Company believes that it has generated a significant interest in its simulators, and that some combination of revenue share agreements, lease agreements and simulator sales agreements with both the original SMS simulator and the new Reactor simulator will be sufficient to fund the daily operations of the business, although there can be no assurances.  Additionally, the Company continues to seek manufacturing financing to fully implement the desired level of growth management believes its revised business model is capable of generating.  The Company’s ability to raise the desired financing will depend on many factors, but the Company intends to leverage the market value of its assets as collateral.  Managementbelieves that some combination of original SMS simulator and new Reactor simulator sales and the increased revenues that come from additional third party revenue share and lease agreements will allow the Company to maintain and increase positive EBITDA and regain profitability, although there can be no assurances.

 

Management is optimistic that the new Reactor will be attractive to customers seeking a lower priced simulator with greater mobility and portability.  The Reactor debuted at the 2005 IAAPA convention in mid-November, 2005. Management is also encouraged by the initial interest in, and the potential profitability of, the mobile application of the new Reactor, although there can be no assurance.

 

On December 31, 2004, March 31, 2005 and April 15, 2005, the Company entered into three Asset Purchase Agreements pursuant to which it sold forty-four (44) of its race car simulators that were located in existing revenue share locations, or had been installed in new revenue share sites.  The Sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13.  While this transaction generated an aggregate purchase price of $2,856,600, it also depleted monthly revenue share payments to the Company generated by the simulators that were sold.  Management intends to contract with revenue share partners and install simulators within its inventory to replenish the cash flow lost from 34 of the 44 simulators that were sold in a timely manner, although there can be no assurances.  The Company has also configured two simulators for lease that were part of the Dodge exhibit atthe Frankfort (Germany) Motor Show, and are expected to be part of the Dodge exhibit at future auto shows throughout Europe.

 

During the three months ending March 31, 2006, the operating activities of the Company used net cash of $300,445 compared to net cash used of $231,185 for the comparable period in 2005. The drivers for the $69,260 increase in cash used from operations can be attributed to the decrease in accounts payable and deposits on simulator sales.

 

During the three months ending March 31, 2006, the Company used $19,927 of net cash in investing activities compared with $145,506 of net cash used in investing activities during the comparable period in 2005. The increase in cash from investing activities is primarily related to the sale of simulators.

 

 

22

During the three months ending March 31, 2006, the Company generated $119,720 of cash from financing activities compared with $502,844 of cash used during the comparable period in 2005.  The proceeds from financing activities is primarily related to the promissory note with MOAC.

 

As of March 31, 2006, the Company had cash totaling $152,828 compared to $353,180 at December 31, 2005. Current assets totaled $534,052 at March 31, 2006 compared to $868,703 on December 31, 2005. Current liabilities totaled $3,552,539 on March 31, 2006 compared with $3,874,458 on December 31, 2005. As such, these amounts represent an overall decrease in working capital of $12,732 for the three months ending March 31, 2006. 

 

**ITEM 3. INTERNAL CONTROLS AND PROCEDURES**

 

The Principal Executive Officer (“PEO”) and the Principal Financial Officer (“PFO”) of the Company (currently one individual) have evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-14 of the Exchange Act) within 90 days prior to the filing of this report. Based on that evaluation, the PEO and PFO have concluded that the Company’s disclosure controls and procedures are adequate and effective. There have been no significant changes in the Company’s internal controls, or in factors that could significantly affect internal controls, subsequent to the most recent evaluation of such controls.

 

 

23

 

**PART II**

 

**ITEM 1. LEGAL PROCEEDINGS** 

 

From time to time, the Company may be party to various legal actions and complaints arising in the ordinary course of business. As of March 31, 2006 and as of the filing of this Interim Report on Form 10-QSB, the Company is not aware of any material legal actions directed against the Company.

 

**ITEM 2. CHANGES IN SECURITIES**

 

None, not applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None, not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None, not applicable.

 

**ITEM 5. OTHER INFORMATION**

 

None, not applicable.

 

 

24

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

| A. | Exhibits. |
|----|-----------|

 

|   | 3(i) | Articles of Incorporation 1 |
|--------|------|-----------------------------|

|   | 3(ii) | By-Laws1 |
|--------|-------|----------|

|   | 10.1 | Form of Secured Bridge Notes 2 |
|--------|------|--------------------------------|

|   | 10.2 | Form of Procurement Contract 3 |
|--------|------|--------------------------------|

|   | 10.3 | Form of Master Revenue Sharing Agreement 3 |
|--------|------|--------------------------------------------|

|   | 10.4 | Asset Purchase Agreement with Race Car Simulation Corporation, a portfolio company of Dolphin Direct Equity Partners, LP 4 |
|--------|------|----------------------------------------------------------------------------------------------------------------------------|

|   | 10.5 | Asset Purchase Agreement with Checker Flag Lightning, LLC (“CFL”), a Michigan limited liability corporation 5                             |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 11.1 | Computation of Earnings (Loss) Per Share |
|--------|------|------------------------------------------|

|   | 14.1 | Code of Ethics |
|--------|------|----------------|

|   | 21.1 | Subsidiaries |
|--------|------|--------------|

|   | 31.1 | Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 32.1 | Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|--------|------|------------------------------------------------------------------------------------------------------|

|   | 32.2 | Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350. |
|--------|------|--------------------------------------------------------------------------------------------------------------------|

 

|   | 1)  Incorporated by reference from Form 10-QSB filed on November 14, 2002 |
|--------|---------------------------------------------------------------------------|

|   | 2)  Incorporated by reference from Form 8-K filed on March 13, 2003 |
|--------|---------------------------------------------------------------------|

3)  Incorporated by reference from Form 10-QSB filed on May 17, 2004

|   | 4)  Incorporated by reference from Form 8-K filed on January 6, 2005 |
|--------|----------------------------------------------------------------------|

|   | 5)  Incorporated by reference from Form 8-K filed on January 6, 2006 |
|--------|----------------------------------------------------------------------|

 

| B. | Reports on Form 8-K. |
|----|----------------------|

 

None

 

 

 

25

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

**INTERACTIVE MOTORSPORTS AND ENTERTAINMENT CORP.**

 

|   | Date: November 20, 2006 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 

 

|   | Date: November 20, 2006 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

|   | (Principal Executive Officer) |
|--------|-------------------------------|

 

|   | Date: November 20, 2006 | By: | */s/ William R. Donaldson* |
|--------|-------------------------|-----|----------------------------|

*-----------------------------------------------*

William R. Donaldson

Chairman of the Board and Chief Executive Officer

|   | (Principal Financial Officer) |
|--------|-------------------------------|

 

 

 

26

**EXHIBIT INDEX**

 

Exhibits:

 

|   | 11.1 | Computation of Earnings (Loss) Per Share |
|--------|------|------------------------------------------|

|   | 31.1 | Certification of William R. Donaldson as Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Security Exchange Act of 1934. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 32.1 | Certification of William R. Donaldson as Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|--------|------|------------------------------------------------------------------------------------------------------|

|   | 32.2 | Certification of William R. Donaldson as Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350. |
|--------|------|--------------------------------------------------------------------------------------------------------------------|

 

 

 

27